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Ahhh… It’s another FOMC week! After last week’s rumors about more quantitative easing, all eyes will be on tomorrow’s statement. After those big boys over at Goldman Sachs said that the Fed may resume quantitative easing measures this year, the dollar tanked like Lebron James’ latest Q Score!

Investors and traders will be locking in on tomorrow’s statement, waiting for any clues as to what the Fed has planned for the US economy.

Here are three things you should look out for…

1. Deflation

Last week, we received some mixed CPI data. Yeah, yeah, I know that the headline CPI showed an increase of 0.3%, which was higher than the expected 0.2% figure. However, core CPI, which doesn’t include energy costs, flat-lined and showed no growth. More importantly, this has been an ongoing trend, as core CPI figures have posted five consecutive months of sub 1% year-on-year growth.

If inflation concerns remain subdued, it will put a hole in the argument that too much stimulus will lead to a run of hyperinflation. If inflation remains low, Fed officials just might say, “Aw, what the heck. Let’s just dump more money into the system and keep rates near zero! We have room to add more quantitative easing, so why not?” Okay, I paraphrase, but you get my point.

2. Talk of any weakness in the US markets

Another thing to pay attention to is any mention of weakness in the US markets. Last week, both the Philadelphia “Philly” Fed manufacturing index and Empire State index came out with disappointing readings. Take note that, unlike most economic reports, these are leading indices, which means they are predictive in nature.

Let me start with the Philly Fed index. According to the report, manufacturing in the Philadelphia state area remained weak in September. While the reading is an improvement from August, it still stood at -0.7, which means that manufacturers expect that business activity will continue to contract. Digging deeper into the report would reveal that the important components of the report like new orders, shipments, and inventories all fell.

And then there’s the Empire State index. While it stayed in the positive region, the figure for September dropped back to 4.1. Like the Philly Fed Index, the component that measured how optimistic manufacturers are about the future also declined.

Uh-oh, this is bad news. The manufacturing sector has been one of the primary drivers of job growth in the past year, so a slowdown could draw the Fed’s attention!


3. More hints of quantitative easing

So does this mean that the Fed will go all Batman on the US and use its gadgets to help the economy? Although I bet that Fed Chairman Ben Bernanke looks awesome in a Velcro suit, many analysts believe that the Fed will once again sing to the tune of “keeping low interest rates for an extended period” due to high unemployment and low inflation.

Also, analysts aren’t keeping their fingers crossed for an expansion in quantitative easing measures. You see, although economic conditions are pointing to further easing, many predict that the Fed will wait and see if additional stimulus is really needed to support the economy’s growth.

Nevertheless, I do believe we could be in for some big market moves after Fed officials reveal their personal opinions. For one, while they may pause on any additional measures, Fed officials may drop clues as to what direction the central bank will be taking. Will some members bring up the possibility of a – gasp – double dip recession?!

Remember, in their meeting last August 10, Fed officials had some differing views on the growth of the economy. Could we see more of the same tomorrow? Will more members point to weakening economic fundamentals? Will Pipcrawler finally take a shower (huwhaatttt?!)

Ahhh… so many questions, all of which could be answered in tomorrow’s statement. With summer officially over, we could see more volatile moves in the market. Let’s see what effect the FOMC statement will have on market sentiment as we enter the last quarter of the year!